Australia 2010: Unstable Politics in a Prosperous Country

2010 has been something of an annus mirabilis in Australian politics. On 24 June a prime minister was dumped before facing the voters a second time. This was the first time ever for such an early exit. Then the election on 22 August produced a “hung parliament”, an outcome not seen since the 1940s. Having fallen short of enough seats to form government, the major parties are scrambling for the support of four independents and one Green in the House of Representatives.

If this looks like the politics of a nation mired in economic upheaval, the reality is far different. Australia was one of a handful of advanced countries to avoid recession during the financial crisis. The unemployment rate never rose much above 5 per cent. For some economists, Australia is “the wonder from down under”.

So why did the Labor government, elected in 2007, fall apart? There was certainly a lack of governing experience after eleven years in opposition. But in a broader sense, the political class is struggling to cope with Australia’s increasingly regionalised economy, and the divergent sources of its new-found prosperity.

Like many industrialised countries, Australia passed through a seemingly intractable malaise in the 1970s. The country’s predicament appeared worse than that of more diverse and innovative economies like the United States. Relying on agricultural and mineral exports, legacies of a colonial past, Australia’s manufacturing base was inward-looking, outmoded and sclerotic. Disparaging assessments like that of former Singapore Prime Minister Lee Kwan Yew - Australians were destined to be “the poor white trash of Asia” - were common. Some fretted about “the Argentine route”, a country failing to diversify its economy and sliding down world rankings of GDP per capita. As transformed manufactures and high-tech products gobbled up an increasing share of world trade, Australia seemed stuck in the slow lane of commodity exports.

And then came the 1980s. Protective barriers were slashed, the currency was floated, the financial system was opened up to foreign banks and state-owned agencies were sold off or treated to radical micro-economic reform. By the mid-2000s, the contours of the economy had changed. Activities such as business and property services rose from 10 to almost 15 per cent of GDP over the decade to 2006. Meanwhile manufacturing declined from 15 to 12 per cent. The new economy was dominated by services, now accounting for 68 per cent of GDP. Rather than drag down the economy, however, mining enjoyed parallel growth, from 4.5 to 8 per cent in the same period. China’s explosive arrival on the world scene shifted commodity exports into a very fast lane. These developments set Australia on a growth path that few could have foreseen in the 1970s. A small economy in relative terms to countries like China and the United States, it has evolved into a series of distinct geographic regions.

The booming commodities export sector, dominated by mining, is concentrated in the northern and western states of Queensland and Western Australia, which account for 74 per cent of onshore mining production. Business and property services are concentrated in the south-eastern states of New South Wales and Victoria, specifically the inner precincts of Sydney and Melbourne, the nation’s emerging global cities. Together, these cities host around 50 per cent of Australia’s finance industry jobs. Public sector services, mostly in health and education, figure prominently in the populous south-east, again skewed towards long-established inner-city localities, where the most prestigious institutions are found. Construction, consumer services, including retail, and light manufacturing, fuelled by demand for household goods and building supplies, thrive in the larger metropolitan regions with high rates of immigration and population growth, like outer Sydney and Melbourne, and increasingly south-east Queensland.

At the end the true driver of the economy lies with commodities. Today mineral resources make up just under 80 per cent of Australia’s commodity trade and around half of all exports (including services). Australia is the world's leading exporter of coal and iron ore and ranks high other minerals like zinc and aluminium.

Reaping the China bounty, former Prime Minister John Howard kept the federal budget in surplus and reduced government debt to zero, while handing out tax cuts and family income supplements. This winning combination delivered Howard eleven years in power. Towards the end of his rule, however, strains in the boom economy began to manifest themselves. Skilled labour shortages and the heated property market began to put pressure on inflation and interest rates, contributing to a sense of policy exhaustion in Howard’s later years.

By 2007, there was a widespread view that the benefits of the resources boom were not being distributed fairly. The service sector professionals of the south-east, especially in the public sector who dominate the national media, began to shift to Labor as did outer suburban workers, who saw the dream of home ownership slipping beyond their reach. Forced to compete for investment in the open economy, south-eastern state governments, controlled by Labor, were constrained to keep taxes low. An ever larger proportion of their budgets was channelled into health and education services, partly due to close links with powerful public sector unions. There was little left to pay for urban infrastructure on the booming fringes.

In response, infrastructure costs were shifted onto developers and local government, along with a new set of regulations, and urban consolidation (“smart growth”) was enforced as planning policy, ostensibly to reduce the need for extra resources. These choices reflected the green ideology taking hold in the planning profession, as well as among the professional classes.

The impact of these measures on housing affordability were disastrous. When the low interest rates of the Howard years began to creep up, the problem turned into a crisis, as the Demographia survey has shown. The property market slowed down, depriving the south-eastern states of even more funds, since property taxes are a significant share of their revenues. This contrasted with conditions in the mining states, prompting the Federal Treasury Secretary to declare Australia a “two speed economy”.

At the 2007 election, Labor leader Kevin Rudd claimed to have the solutions. Paying lip service to Howard’s fiscal conservatism, he signalled plans to divert mining boom proceeds towards infrastructure and services, including a new deal on health funding and an “education revolution“. Much of this was wrapped up in the rhetoric of climate change, talked up by Rudd as “the greatest moral challenge of our time”. His environmental centrepiece was an Emissions Trading Scheme (cap and trade), a massive revenue raising device for the federal government. In essence it was a mechanism for transferring wealth from the mining states, and their fossil-fuelled economies, to the populous south-east.

Rudd’s electoral success, and apparent public support for climate action, drove the agenda forward until the crash at Copenhagen. This precipitated a revolt in the opposition Coalition, which replaced ETS supporter Malcolm Turnbull with climate-sceptic Tony Abbott. When Abbott labelled the ETS “a great big new tax on everything“, and blocked its passage in the Senate, public interest in the scheme melted away, particularly in the mining regions. Rudd lost his nerve and shelved it until 2012. For many Australians, he was exposed as a weak leader without the courage of his convictions.

Rudd refused to give up his dream of redistribution though, turning to Plan B. Having commissioned a review of Australia’s taxation system, he announced a Resource Super Profits Tax, a complex device confiscating up to 40 per cent of mining profits above a threshold. Adopted without consulting the resources industry, it attracted furious opposition from the global mining companies, which launched a powerful advertising campaign against it. Opposition leader Abbott labelled the measure ”a great big new tax on mining”. Opinion polls showed strong opposition to the tax in mining states, and mild support in the south-east. Rudd’s poll ratings fell through the floor. He was soon deposed by his Labor Party colleagues.

Julia Gillard, the new prime minister, substantially modified the proposal after negotiations with the large miners, but smaller operators remained opposed, along with most of Queensland and Western Australia. Gillard quickly called an election to capitalise on her status as the country’s first female leader. But the legacy of Rudd’s undelivered promises shaped the outcome. Australia’s regional divisions were clearly evident in the voting patterns. Western Australia and Queensland swung to the Coalition, and Queensland proved to be a killing ground, depriving Labor of nine seats. New South Wales also swung to the Coalition, reflecting dissatisfaction with the long-serving state Labor government’s failure to address the infrastructure and housing needs of suburban western Sydney. In contrast, the southern states of Victoria, Tasmania and South Australia swung towards Labor.

Well over half of Labor’s lost votes moved left to the Greens, who more than doubled their share of the vote, rather than right to the Coalition. Increasing numbers of south-eastern professionals consider the Greens their preferred agent of redistribution. Handing the Greens the balance of power in the Senate, and possibly the House of Representatives (only one seat this time), may prove a better strategy than sticking with a fractured Labor Party. Inevitably though, regional and outer-suburban voters, with their divergent priorities, will react to a green-dominated agenda, which tends to dismiss suburban interests. Over time, and perhaps after the next election, this may mean a shift back to the right and a clear Coalition victory.

John Muscat is a Sydney lawyer and co-editor of The New City (www.thenewcityjournal.net), a web journal of urban and political affairs.

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In the politics you can't make everyone happy as my good friend Aaron DelSignore says. But, and this is the key aspect of politics if you want to be successful: you must be fair and think of the future to come.